The bank, the school and the 38-year loan

Borrowing through capital-appreciation bonds is helping to pay for a 600-seat performing arts center at El Dorado High School in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008.JEBB HARRIS, ORANGE COUNTY REGISTER

FINDINGS OF THIS INVESTIGATION:

Dozens of California school districts signed up for all-inclusive bond programs that circumvented state law and government best practices. Many of them paid underwriting fees twice the national average.

The schools hired George K. Baum with the understanding that its political consultants would help pass a bond measure in upcoming elections. This violates state law.

The bank did not disclose the value of its political consultants’ time as a donation in election reports, as required by the state Political Reform Act.

Most of the schools neither sold bonds through public auctions nor employed independent financial advisers.

To avoid debt restrictions, the bank designed complex bonds that delayed payments for as long as 40 years.

The schools sold some of the costliest bonds ever issued by the state’s public agencies. San Bernardino County’s Rim of the World district will pay $23 for each $1 it borrowed.

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The fliers touted new ballfields, science labs and modern classrooms. They didn't mention the crushing debt or the investment bank that stood to make millions.

In early 2008, residents of Placentia and Yorba Linda approved a $200 million school construction bond after reading those fliers and being assured repeatedly that "their money will be spent wisely."

What happened instead was that Measure A led to a debt so large and long lasting that it has mortgaged the future of their children's children.

With no public discussion, the school board had hired George K. Baum & Co. and its staff of political strategists to help push the measure through so the district could continue an ambitious building spree.

After the election, the board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount – $280 million – to repay.

Those bonds, known to Wall Street traders as capital appreciation bonds, are like a loan for which no principal or interest payments are made for 35 years. Interest is charged on a growing pile of unpaid interest, causing the balance to balloon.

"It's another method of pushing debt to future generations," said state Treasurer Bill Lockyer, who compares the bonds to "payday loans."

"I just don't understand how these board members got away with this," said Alexandria Coronado, a former member of the Orange County Board of Education. "These people need to be recalled."

Placentia-Yorba Linda Unified is hardly alone. Bankers from Stone & Youngberg, Piper Jaffray and other firms have traveled all over California in recent years, pushing capital appreciation bonds as a tool to vault over legal debt limits. Hundreds of school districts, including 14 in Orange County, signed up.

But Baum's deals stand out. According to an analysis of data from the state treasurer's office, Baum has issued more than 60 capital appreciation bonds for California school districts since 2007, including the single most expensive such loan. That debt – $283,612 borrowed by San Bernardino County's Rim of the World – will cost future taxpayers 23 times the principal.

Compare that with a 30-year home mortgage with a 5 percent interest rate, which requires payments of about twice the amount borrowed.

"Who borrows money thinking you don't have to even begin to pay interest for 20 years?" asked Kevin Graves of Lake Arrowhead, whose two children graduated from Rim of the World. "The board members knew what they were doing. They did it because there were no consequences."

The story of how Baum pushed California schools into complex bond deals that chargedpayments to future taxpayers is one of naïve public officials, sophisticated financiers, and laws, rules and guidelines ignored:

•It is illegal for California school officials to hire political consultants with public funds to help pass bond measures. Using the bank's political consultants is not a legal way around that law, according to the state Office of Legislative Counsel.

•Finance experts advise school districts to sell bonds through public auctions to get the lowest interest rate and to employ independent financial advisers to review the details. Placentia-Yorba Linda, like most of Baum's California school clients, did neither.

•State law requires that donated consulting work on an election be reported as an in-kind, or non-cash, political contribution. Baum did not disclose its consulting role on state campaign filings in three elections the Orange County Register reviewed.

Placentia-Yorba Linda Superintendent Doug Domene and all five board members declined repeated requests for an interview. Carol Downey, the board's president, sent a written response prepared by Domene. That statement said the district issued the capital appreciation bonds because it wanted to continue building but did not want to raise taxes. The district's construction effort, which began in 2002, has included four new schools, a football stadium and a 600-seat performing arts center.

Domene added that the district also wanted to take advantage of matching construction funds provided by the state, as well as special financing that is heavily subsidized by federal taxpayers.

Borrowing through capital-appreciation bonds is helping to pay for a 600-seat performing arts center at El Dorado High School in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008. JEBB HARRIS, ORANGE COUNTY REGISTER
Superintendent Doug Domene, left, and Director of Facilities and Maintenance Rick Guaderrama stand at the site of the new performing arts center at El Dorado High School in Placentia. The music hall will be built with the help of controversial capital-appreciation bonds, which delay payments for three decades. CORINNE GRIFFITHS, FOR THE REGISTER
Alexzis Fukuji, left, and Lynn Paquin, representatives of bond underwriter George K. Baum & Co., defended the issuance of capital-appreciation bonds at a meeting of Rim of the World School District trustees. The district's bonds were the most expensive in the state. MIKE HARRIS, THE MOUNTAIN NEWS
Doug Domene, superintendent of Placentia-Yorba Linda Unified School District; Carol Downey, president of the board; and other board members and staff members shown at a meeting Feb. 12. The board unanimously approved the issuance of capital-appreciation bonds, requiring payments of $13 for each $1 borrowed, in February 2011. LEONARD ORTIZ, ORANGE COUNTY REGISTER
Yorba Linda High's new aquatics center, one of the projects funded by the $200 million Measure A program. Although most of the Measure A bonds are traditional general-obligation bonds, one $22 million issue is a capital-appreciation bond that will cost $280 million and won't be repaid until 2049.
Principal Gordon Chamberlin and counselor Karen Edwards prepare to give a tour of the recently rebuilt El Camino Real High School in Placentia. The Placentia Yorba Linda Unified School District helped pay for the construction with millions of dollars worth of controversial capital-appreciation bonds. Chamberlin says, "Teacher and student pride is the best thing about the new campus. Before, that wasn't the case." JEBB HARRIS, ORANGE COUNTY REGISTER
An artist's rendering of the new performing arts center at El Dorado High School. The music hall's construction will be paid in part by capital-appreciation bonds issued by the Placentia-Yorba Linda Unified School District in 2011. COURTESY: PYLUSD
Lisa Gersbacher teaches Earth sciences in one of two new science classrooms at El Camino Real High School in Placentia. Capital-appreciation bonds issued in March 2011 helped pay for the classrooms. JEBB HARRIS, ORANGE COUNTY REGISTER
Construction of the Yorba Linda High School Aquatics Center was completed with the help of capital-appreciation bonds, which the district issued in March 2011. MICHAEL KITADA, FOR THE REGISTER

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